Eurozone Inflation Stays Low

31 Aug 2015 | Author: | No comments yet »

Euro-Area Inflation Stays at 0.2% as ECB Sees Downside Risks.

Eurozone consumer prices were barely higher than a year earlier in August, a development likely to fuel speculation that the European Central Bank will have to expand its recently launched bond-buying program.Mario Draghi may have skipped the Federal Reserve’s Jackson Hole symposium this year, but he can’t dodge its conclusion: central banks can’t steer inflation as well as they thought.

Yields on benchmark bunds have stayed below 1 percent since June and slid to as low as 0.51 percent last week as China’s cooling economy and lower commodity prices fueled bets that central bankers around the world will either loosen monetary policy or delay plans to raise interest rates. Share prices have wildly see-sawed, but trading received a lift later in the week from comments by US Federal Reserve officials, who said the current turmoil had weakened the case for a US interest rate rise in September. The next month, the ECB announced the launch of a program of quantitative easing, under which it would buy more than €1 trillion ($1.12 trillion) of mostly government bonds.

Annual consumer-price growth in the euro region stayed at 0.2 percent this month, the European Union’s statistics office in Luxembourg said in a report on Monday. The ECB is unlikely to be panicked into knee-jerk policy moves, since its radical asset purchase programme known as quantitative easing (QE) finally appears to be bearing fruit, central bank watchers said. The ECB has cut interest rates and is buying bonds to battle anemic inflation, which has been below the central bank’s goal of just under 2 percent for two years. The newest risk to prices highlights how in the 19-nation currency bloc — as in the U.S., the U.K. and other industrialized nations — headline inflation is still far below target even as the economy recovers.

ECB officials are due to announce their latest interest-rate decision and give updated inflation forecasts on Sept. 3. “I’m quite sure we’ll see a significant reduction in their inflation forecasts, and the interesting question will be whether they maintain their growth outlook,” Marius Daheim, a senior rates strategist at SEB AB in Frankfurt, said before the inflation data were released. “There still are probably a few investors who are moderately betting on yields to drop further.” Germany’s 10-year bund yield fell two basis points, or 0.02 percentage point, to 0.72 percent at 10:06 a.m. Whether that heightens calls for the ECB to step up its 1.1 trillion-euro ($1.2 trillion) quantitative-easing program will depend on how Draghi communicates the complex economic picture. A Bloomberg gauge that tracks returns from 22 raw materials plunged to the lowest level since 1999 last week on concern a glut in everything from oil to copper will be exacerbated as the Chinese economy grows at the slowest pace in more than two decades. “Developments in the world economy and in commodity markets have increased the downside risk of achieving the sustainable inflation path toward 2 percent,” he said.

To contact the reporter on this story: Catherine Bosley in Zurich at To contact the editors responsible for this story: Fergal O’Brien at Zoe Schneeweiss Speaking last week, ECB Chief Economist Peter Praet said the risk of a lengthy period of very low inflation in Europe had intensified due to falling commodity prices and slower growth in developing economies such as China. Even Germany, where growth is picking up with confidence on the rise and public finances in the black, was showing no real signs of overheating, Mr Knibbe said. The ECB’s Governing Council will convene in Frankfurt from Sept. 2 to set monetary policy, and Draghi will present the quarterly economic forecasts at a press conference the next day. Officials including Executive Board member Peter Praet, the ECB’s chief economist, said last week that they’re ready to extend or expand QE if needed. “The ECB staff macroeconomic projections are likely to show a downward revision in inflation forecasts for both 2015 and 2016, resulting from a stronger euro and weaker oil-price futures,” Philippe Gudin, chief European economist at Barclays Plc in Paris, said in an Aug. 28 note to clients. “We now expect further easing to be announced before year-end.” Central bankers will have an opportunity to discuss their predicament again starting Sept. 4, when they and finance ministers from the Group of 20 nations gather for a two-day meeting in Ankara.

But let us be clear: even without such turbulences, the ECB would have had to extend its QE programme, since core inflation will remain far below price stability for structural reasons,” Mr Broyer said. At Jackson Hole, academics effectively delivered a beating to central banks’ confidence in their ability to predict and manage their key variable, by pointing out wide gaps in knowledge about how inflation works. Worse still, trying to influence inflation while not understanding it is a “recipe for disaster,” according to MIT Sloan School of Management professor Athanasios Orphanides, himself a former ECB Governing Council member.

While that doesn’t appear to have heralded the onset of a more severe downturn, the eurozone’s expansion seems likely to be too weak to quickly lower very high rates of unemployment and give a stronger boost to domestic demand, which would in turn help push prices higher. But with the lower oil price and stronger currency adding to deflation risks, president Mario Draghi is likely to stress that further support is possible in future and perhaps outline how this could be provided,” Ms McKeown said. For Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, the risk remains that there may be less room than claimed to ease policy.

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